01 Mar 2008
One-on-One with Jim Breyer
Partner, Accel Partnersby Roger ThompsonTopics:
In a year when the highest percentage of HBS graduates ever went to Wall Street, Jim Breyer (MBA ’87) headed west to join an upstart venture capital firm called Accel Partners. He figured he’d stay a couple of years and then maybe start his own company. Twenty years later, he’s still at Accel and can lay claim to one of the most storied careers in the venture industry: 25 companies that have completed IPOs or successful mergers; directorships with Wal-Mart Stores, Marvel Entertainment, and Facebook, among others; and past chairman of the National Venture Capital Association.
When it comes to technology start-ups, Accel’s niche, Breyer ascribes the firm’s success to “a balance of people judgment, market intuition, as well as luck,” with luck sometimes claiming top billing. He candidly admits to down moments. “In every deal I can think of, there’s a dark day when board members sit around the table and simply wonder how we can dig ourselves out of the hole we’re in.” On balance, the firm excels at solving even the toughest problems, as evidenced by its track record as a top-tier firm. As opportunities have expanded abroad, Accel has been among the first venture capital firms to go global with partners in London and Beijing.
In a recent interview at his Palo Alto, California, office, Breyer talked about tech investing, Chinese entrepreneurs, and Washington politics.
Accel closed a $520 million fund, your tenth, in November. Where do you expect to invest all that money?
Typically we’ll invest a new fund over a three-year period, and then go out and raise our next fund. Accel IX, which we started investing in January 2005, is very much focused on consumer Internet, mobile communications, and enterprise storage and networking opportunities. About half the deals are next-generation Internet companies such as Facebook, Brightcove, Prosper Marketplace, and Glam Media.
The other half would be the more traditional technology-based deals where there is defensible technology and long-term, hopefully defensible intellectual property. Accel X, our new fund, is likely to be very similar in its composition.
You didn’t use the term Web 2.0 to describe your investment prospects. Why not?
It almost never gets mentioned here. We talked a lot about Web 2.0 in 2003 and 2004 as we looked for new deals. At this stage it really is a phrase that almost implies a consumer Internet bubble, with a number of me-too projects that will continue to get funded. We simply do not ever want to be chasing hot sectors. As we think about Internet opportunities, Web 2.0 would no longer represent what would be fundamentally interesting. We’re much more focused today on specific Internet opportunities where there are certainly Web 2.0 characteristics, but they are very different in the kinds of models they’re pursuing and the kind of focus.
Accel specializes in technology investments. Is specialization necessary to become a top-tier fund?
It’s a requirement to know where you are on the playing field. Different firms can come at the business in very different ways. For Accel, historically we have specialized. Over time, those specializations continue to become more granular. At the same time there are clearly sets of skills within a partnership that are very important.
One is generalist investment skills combined with industry specialization. A balance between investment prowess and operating knowledge is important as well, since we really do typically lead or colead our investments and go on boards and work closely with the companies anywhere from five to ten years.
We also look for a balance in ages and generations. We have partners here at Accel who are still active in their 60s, 50s, 40s, and 30s, as well as a couple of people in their late 20s. The balance between age and experience is critical for merging disruptive thinking with pattern recognition. Our partners combine tenacity and confidence with a large dose of humility.
Accel prefers early-stage companies. Isn’t that the riskiest strategy?
It is certainly the riskiest part of the business. At the same time, it’s what we’ve done over a period of years. We like to think that we will make a mistake only once and learn from it. We also are humbled every day by a new mistake. But it is the kind of investing that the partners here very much enjoy. We believe that getting in early and working with management teams and entrepreneurs to build businesses long term is a very attractive place to invest. The investment and venture capital cycle is continuously changing, and one of the most fascinating internal discussions is often around where we’re in the cycle.
When you first evaluated Facebook three years ago, was its perceived potential more important than seeing a business plan with a clear path to financial success?
Absolutely. With Facebook, we saw an opportunity to build a deep and growing engagement with a targeted demographic. Very typically we look for a business plan that demonstrates differential insight. The team is more important than the precise strategy because strategies typically change over time, even for the best entrepreneurial teams.
We also tend to be investors that focus very heavily on market share and growth. A typical business that we would like to see is one where there’s a very simple idea that has high-potential early market share. Most of the best businesses in Silicon Valley started with a very simple concept and extended into adjacent market segments as well as into global markets.
Accel recently closed its second Chinese fund, this one for $510 million, co-managed with IDG. Why are you limiting your Chinese investments to firms with only domestic growth opportunities?
Growth in the Chinese middle class and on-the-ground entrepreneurship indicate that the most attractive opportunities will be companies that win by focusing on really understanding the Chinese consumer.
By one count, there are 6,000 venture-backed companies in Beijing alone. Is there an investment bubble in China?
Yes, so our job is to manage, as best we can, through the bubbles. Today in China, there is simply too much investment in young Internet companies, in particular, most of which are based in Beijing. Valuations in the Chinese market are, in many ways, reminiscent of the late ’90s here in the United States for similar types of Internet companies. We have an extraordinary team of partners in China led by Quan Zhou, Hugo Shong (AMP 151, 1996), and Young Guo. The cornerstone of our Chinese investment strategy has been to proactively identify emerging Internet leaders that combine long-term fundamental growth and strong cash flow.
In China, virtually no company of any size exists without government investment. How does that affect how you invest in Chinese firms?
The companies that we invest in tend to be a bit different from mainstream Chinese companies because they’re small entrepreneurial Internet ventures initially. In almost all the companies that we back in China, there is little or no government investment. We don’t invest in state-owned enterprises, and we don’t try to do recapitalizations. Rather, we’re trying to get in very early with young Internet companies and help them establish strong government relationships and superior government support.
You also have an Accel office in London. Must top-tier venture capital firms have an international presence?
It’s a matter of debate. For Accel, we came to that conclusion, given the nature of the kinds of investments we make where we focus very specifically by industry. We try to take a very proactive, analytical, prepared-mind view of where the opportunities are. The international markets have always been very important for us. It’s our belief that even though there is more complexity around managing an international venture capital firm, there are great benefits to understanding what’s happening in other geographies. A simple example is how much there is to be learned from emerging Internet business models that are working in China, Japan, and Korea.
Is the epicenter of venture capital shifting from the United States to Asia and Europe?
There’s no doubt the venture capital business continues to expand. In many ways it’s very similar to what we’ve seen with the private equity business. However, many of the very best firms in Europe and in Asia are affiliated with firms here in the United States.
Venture capital has been practiced in a deeper, more profound way in the United States than anywhere else in the world for decades. There’s a pattern recognition and real-time knowledge that comes with investing and building companies from the earliest stages over a long period of time. The United States will continue to be the epicenter, but the ripples will reach out to different parts of the world.
Congress has passed a measure that would treat VC profits not as capital gains but as ordinary income, which would roughly double the tax rate from 15 percent to 30 percent or more. Would such an increase harm venture capital?
I don’t think it would be a good thing, and I say this, of course, with an admitted strong bias. Long-term investment in particular should be viewed as something to be encouraged. Here at Accel, we take the view that if we are holding investments in companies for a period of three or five years, or in many cases seven or ten years, it’s appropriate for any gains that might be generated on those investments to be taxed at a lower rate than ordinary income.
A recent BusinessWeek article opined that it's a bad time to be a venture capitalist. Do you agree?
It depends on how one looks at the business. We believe that when you see articles that question whether it’s a good time to be a venture capitalist, we are in the better part of a new investment cycle. It pays to be a contrarian. We need that kind of press to help fuel what typically would be a good number of investing years going forward.
Are entrepreneurs born or made?
It’s a combination. There are some gifted entrepreneurs who have an intuitive sense of how products, customers, and markets will collide three to five years out. They bring intellectual leadership combined with an extraordinary feel for how markets evolve.
In all cases, however, these individuals are among the hardest-working executives in the portfolio. The balance between optimism, candidness, intellectual honesty, and integrity results in a virtuous set of characteristics that are shared by all exceptional entrepreneurs.
Class of MBA 1987, Section D